Second judicial recovery is rare, and Oi will now have more difficulties

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The telephone company Oi should soon file for a second judicial recovery, something hitherto unheard of among large Brazilian companies.

On Wednesday (1st), Oi filed a request for an urgent precautionary measure with the 7th Business Court of the TJRJ (Court of Justice of the State of Rio de Janeiro) to prevent its assets from being blocked at the request of creditors. The company claims to have debts of R$ 29 billion.

In the guardianship request, the company says that the non-payment of more than R$ 600 million due on the 5th of February would result in the early maturity of almost all of the financial debt (R$ 29 billion), because of the clauses provided for in their financial contracts.

The company had completed its recovery process in December. The need for a new order in such a short time surprised industry professionals, who cannot remember seeing a large company go through such a situation.

Brazilian law determines that a company can only file for a new judicial recovery five years after the start of the first process.

Oi filed for judicial recovery in June 2016, at the Court of Justice of Rio de Janeiro, after accumulating a gross debt of approximately R$ 65 billion, with more than 55 thousand creditors. The current list of creditors has not yet been released.

Oi’s first RJ was only granted on February 5, 2018. So, theoretically, a new order could be placed from February 5, 2023, next Sunday. However, there are doubts about this, because the process had additives.

“There is a legal and jurisprudential discussion whether this period should start from the beginning of the process or from the presentation of the last amendment. Most likely the creditors who disagree with the new RJ will file legal measures to try to prevent the process”, analyzes Filipe Denki, director of Commission for Business Recovery and Bankruptcy of the Federal Council of OAB and partner of Lara Martins Advogados.

“There are doubts whether [a situação da Oi] it’s a problem in the telephone sector, poor economic and financial management of the company or the judicial recovery institute itself”, questions Denki

The presentation of the request for an urgent precautionary measure serves to anticipate the benefits of a request for judicial recovery itself, especially to prevent assets from being blocked to pay creditors.

If the Court approves this precautionary measure, Oi is then protected against creditors and has up to 30 days to file a recovery request. There is, however, no deadline for the Court to assess the request for urgent precautionary relief. Until 19:25 this Thursday (2), there was no news about this decision.

Once a new request for judicial recovery has been submitted, it will have to be accepted by the Justice. If the request is denied, the company would end up having to declare bankruptcy, as creditors could take equity to offset the payment of debts.

“I don’t think the judge will deny [o pedido de recuperação] due to the size of the company, which generates many jobs, taxes and has many creditors, but does not have that many assets to pay all of them. But he will do a lot to try to avoid a third judicial recovery”, evaluates Irineu Soares, research coordinator of the Mackenzie Rio law course.

In a recovery process, the company can stop paying creditors for some time, but needs to present a plan to settle accounts and continue operating afterwards.

In case of bankruptcy, the assets are sold to raise money to pay the debts of the company, which ceases to exist.

To pay off debts, it is common for the company undergoing recovery to sell part of its assets. That’s what Oi did: it sold its mobile telephony assets to TIM, Claro and Telefônica Brasil (Vivo) in an auction at the end of 2020, with a joint proposal of R$ 16.5 billion, but the value is the subject of dispute.

Now, if the second recovery request goes ahead, there will be fewer assets to sell, which will make plans more difficult. Oi currently offers landline, broadband and pay TV services for homes and digital services for companies, such as internet connections and cloud data storage.

At the end of 2021, Oi served 3.4 million homes with fiber optic internet, according to its income statement.

“When a company enters into recovery, it is generally no longer able to make installment purchases. It can only buy in cash or by paying in advance. Credit is very expensive”, explains Denki.

One way out is the type of loan called DIP (from the English debtor-in-possesion financing, or “financing of the debtor in possession”), a financing model studied by Americanas. Under this model, the company pays higher interest rates to raise funds, and can pay them later with shares, if the recovery prospers.

Sought after, Oi responded this Thursday (2) that the request for relief was a measure to protect the company and its subsidiaries against the enforceability of credits and guarantees, in addition to allowing the advancement of discussions and dealings with creditors.

“Aware of the relevance of its role in the Brazilian market, Oi must and will continue to explore all available options to optimize its liquidity and guarantee the full execution of its long-term strategic plan, serving not only its economic and social interests, but also those of its shareholders and other stakeholders,” he said in a note.

In the text, the company also recognizes that it has just left the largest judicial recovery process in the history of Brazil, but that, “unfortunately, several unpredictable, uncontrollable factors, and its current economic and financial situation made it essential to resort to judicial protection for implement a new stage of its restructuring and guarantee the preservation of the company, as a great generator of jobs and income”.

Oi also says that the first judicial reorganization was “unquestionably successful”, but that the company’s capital structure remains unsustainable.

If the liability declared by Oi is confirmed after a possible request from RJ, Oi will appear twice on the list of the five largest recovery operations in the history of Brazil: in second and fifth place.

The ranking is led by Odebrecht (R$ 80 billion), followed by Oi (R$ 65 billion) and Samarco (R$ 55 billion). The Americanas lawsuit appears in fourth place (almost R$ 48 billion).


Hi’s trajectory

1998

Telephony is privatized in Brazil. The companies in the North, Northeast and Southeast states, except for Acre and São Paulo, are sold in blocks to a consortium led by Andrade Gutierrez and form Telemar.

2002

Telemar launches a cell phone service called Oi

2007

Telemar changes its trade name and is now called Oi

2009

After a change in the law made by the Lula government, Oi buys Brasil Telecom, which operated telephone services in the South and Midwest regions. With that, the company started to dominate fixed telephony in all Brazilian states, with the exception of São Paulo.

2010

Oi announces the acquisition of Portugal Telecom

2014

A leak is discovered at Portugal Telecom, which affects Oi’s cash

2015

Oi sells Portugal Telecom to Altice

2016

Oi files for judicial recovery

2020

Oi sells its mobile telephony structure in an auction to its main competitors

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